Brexit risks: The bigger picture

It is very easy to get caught up in the plethora of short-term noise we have in markets today, thanks to 24/7 analysis and social media. News is circulated the moment it breaks as someone somewhere in the world will be awake and able to spread the word.

The advent of the internet and the explosion in social media has been one of the greatest advances in communication and democratic transparency known to man but with it comes the risk of information overload.

A vital part of today’s investor skillset is the ability to sift through all the noise and drill down into what is important and relevant. There is more information to analyse on any subject than there is time available and so time-efficient identification of the key variables ahead of making an investment decision is key to avoid perpetual indecision and paralysis.

The current Brexit campaign is a case in point. Both sides are ramping up their campaign this week now that the local elections, including the London Mayor, are out of the way. Boris Johnson is coming to a hustings near you! As with all electoral campaigns, the politicians love doing what comes easiest to them – talking and a lot of it.

Much of the public have already become jaundiced with the whole affair and bored with the debate as no-one knows what or whom to believe. The various claims and counter-claims are impossible to verify, with any statement from either side being immediately countered with a supposedly correct fact.

We have not yet encountered either side agreeing on anything. The whole debate is centred around disagreeing with the other side on every issue. This means that it is virtually impossible for the poor voter to know where the common ground is and what is factually correct.

This spells utter confusion and probably shifts the outcome to the status quo because when human beings are faced with a choice of leap or do nothing in the face of significant factual uncertainty, they tend to default to ‘better the devil you know’.

This is also true in investment markets when we examine the behaviour of the private investor. When faced with uncertainty and fear, there is an overwhelming tendency to sit tight and do nothing rather than take the plunge, which feels like a risky gamble which could go horribly wrong. If the Brexit debate continues in this way, a confused public will most likely vote for the status quo as why take a risk when we have full employment, economic growth and relative prosperity?

Voting for a radical alternative is an action of desperation and we only have to look to Greece for evidence of that where the economic picture was dire under the previous pro-austerity, pro-EU government. This led to the election of Prime Minister Tsipras from the radical left wing Syriza party on the basis that anything was worth trying to improve the economic situation. We have seen similar economic hardship in France lead to a rise in support for the right wing National Front. Is this really where we are in the UK such that enough people will vote for change? We will see on the 23rd June!

Coming back to the bigger picture, with all this focus on Brexit, this now appears to be an event of global importance and featuring in the strategic missives of international economic commentators. It is increasingly becoming obvious that if we do choose to exit the EU, we will see a major market shock as this outcome is not currently priced in. That said, if we do vote to remain, then there are a number of sectors that are currently depressed ahead of uncertainty around the outcome. This creates opportunity but not without risks of course.